Dallas Housing Market – Interest Rates Affect on Home Values

So, you're thinking of moving to Dallas, Texas? Well, today we are talking about the Dallas housing market and specifically the interest rates. Obviously, our interest rates are continuing to rise. It's what everybody's talking about, the Fed just increased our interest rates another three-quarters of a percent, but more specifically, how is that rising interest rates affecting our mortgage rates and purchasing real estate, and we're going to get after that? Right now.

All right, so today we're talking interest rates with the rise of interest rates. How is that affecting the price of homes? How is it affecting your purchase power when buying that next home and what you can expect in the housing market? So we have found some articles online that we want to talk about, and we are actually going to show you the Dallas housing market trajectory of, the home price appreciation and how it has related to the median home price of homes and the number of homes that are on the market. So, let's kind of jump in and we'll talk to you a little bit about some of these, points that are going on here in the market.

So plain and simple, as the mortgage rates rise, it is much more expensive for somebody to purchase their next house. So, say you're ready to buy a house for $500,000 and the interest rate goes up a percent or 2%, or even half a percent for that matter.  It just is more expensive in that monthly mortgage payment. So, in fact, we had a client who just went through this not that long ago. They had to wait a couple of months before they were ready to buy their next house. And in the meantime, we had that, we saw one of those big jumps in the interest rates and he realized, Okay, well I need to be smart about that. He did have a good down payment, thankfully, but he knew what he wanted that monthly mortgage payment to be, so because of the rise interest rate, he knew that that mortgage payment was going to be higher. So, we adjusted his price point down. Ultimately that is going to be in any situation, obviously, when those interest rates had dropped down to below 3%, I mean even 3%, or even at 5% at this rate these days, as those interest rates are a lot lower, people realize like, Oh my gosh, I want to get into that next house because I can suddenly. Afford a much bigger home. Even, maybe some of these other circumstances hadn't changed, they're realizing that I can get a bigger house, maybe get that pool that I had always wanted, or maybe get into that neighborhood where these schools are for my kids. So a lot of these. People were realizing that they wanted to take advantage of these low-interest rates to get maybe their dream home, especially after recovering from the pandemic and how everything had been put on hold, and a lot of people were so uncertain about what was going on.

So many things had been stalled for a time, which also correlated to new home builds as well. With the new home builds, having to halt production and not being able to get that production out. We had already been in kind of a housing shortage going on and it just put us that much more into available homes that people were trying to get into.

So what did that do well with the changes in mortgage rates? Really started to put a lot more demand on people out there, um, looking for their next house.

So like we see in this graph how that actually with the change in mortgage rates, how that affect, how that affects home prices. Now, back in 2008 and 2009, when the mortgage rates were decreasing, home prices were starting to decrease. So granted, this has been a long time ago now, and it just kind of shows a little bit of the shift and, maybe the biggest crisis that we had seen and how that had adjusted over time. But back then there were a lot fewer strict lending laws. So, when people were going out to purchase a home, they're thinking, You know what, Hey, I just have to, I just have to write down that I make a hundred thousand dollars while on paper. That looks great for a lot of people. , even if they don't make a hundred thousand dollars, but they're wanting to get into this big, beautiful home and maybe they couldn't afford it, they were getting in just by stating that they made a hundred thousand dollars when in fact,  maybe they made $50,000, but obviously significantly less. And a lot of these lenders were putting some of these people into adjustable-rate mortgages. So a three-year arm or a five-year arm where they're just paying that interest for the first three to five years of that loan. So at the end of that time period, people were in for this rude awakening, which in fact they could not afford. To make those monthly mortgage payments. So, we saw this big, huge global financial crisis going on. The mortgage rates and the house prices and everything was starting to fall and in doing so with people losing their homes, we're seeing. Tons of foreclosures and short sales and banks were starting to have this huge inventory of homes on their books, and obviously, the banks didn't want that. So, in doing so, they're trying to recoup a lot of their money and they're trying to get a lot of these homes put back on the market, and so they're decreasing the value of these homes. So that's where we saw the big, huge shift in how the mortgage rates, it didn't matter how low they were, the home prices were decreasing as well. So as time went on, the mortgage rates started to go back up, but the house prices were still decreasing. It was still trying to play catch up and get to a more stable level. So, historically that's probably like the worst situation that we had seen, but then we look at how things have changed over time. And over the past couple of years, from 2021 to 2022, the mortgage rates obviously dropped drastically to some of the lowest that we had ever seen. But in that timeframe, it drove the prices of these homes up because like I had said, a lot more people could afford more homes and they could get in for the same mortgage payment, but they were having a much lower interest rate. So that was driving the prices of these homes up because of these low mortgage rates and because of the low mortgage rates, especially if they were in a really great location, people were coming in offering to pay all the closing costs for, for sellers. Or they were coming in for 5,000, sometimes even 150,000 over the asking price in some of these houses. And when you're paying for the owner's title, policy, and survey and all of the other things.  You're giving the seller money just to be able to get into your next house. And on top of that, we were seeing so many multiple offer situations as well. So many people were losing out on homes. We were seeing a monthly supply of inventory, less than a month's worth, and there just was not enough inventory on the market because not as many people were selling as they had in the past. So we started to see the interest rates finally start to creep back up and even though the mortgage rates were still increasing, they were still lower than some of the historical timeframes and people were still needing to move. People were still needing a home, so home prices were still getting driven up. We are still, um, so we were seeing a lot of that happen over the course of the last couple of years.

So this article had come out by New York Life Investments, and as they talked about here, our historical mortgage rates and house prices are related mortgage rates are rising at their fastest pace in at least 30 years, and as mortgage rates climb, it becomes more expensive to finance a home purchase, which leaves many home buyers with lower budgets. But, Could the house prices drop as a result? So they're talking about how they compare the trends in the historical mortgage rates and the housing prices over the last 30 years, and they calculated the year over year, percentage changes. So when you look at how the mortgage rate declined in housing prices, the number of months was 193. It was the greatest, um, the greatest time where people were purchasing homes, and then the mortgage rate growth and the home price growth still the number of months was 117, so that's second in line. So even though the mortgage rates went up, The home prices were still continuing to climb as well. And the only time that they actually left out of this was during the global financial crisis, they said, but for the most part, they're showing you kind of like historically how over the last 30 years, um, home prices have gone up regardless of the mortgage rates. They talked about here how the mortgage rates and house prices have a weak positive correlation of just 0.126. So it means that when the mortgage rates increase, house prices typically are also going to increase, but what exactly is actually contributing to this? Because I mean, why are people still buying homes if the mortgage rates are going up? Well, as people talk about all the time, people are buying homes every single. Regardless of the interest rates back, even when our parents were buying homes, people are, for whatever reason, somebody needs to purchase a home every single day in any market, in any part of the country because whether you're relocating for whatever reason, or you absolutely need a home or. For whatever reason, you need to purchase a home and you need to get into that house. So obviously people are always buying homes, and it's just a matter of how much the homes are going up or if it's a decline or an increase or whatever is going on in the market. So these mortgage rate increases are associated. They're talking about here periods where the Federal Reserve is raising that policy rate in response to the inflation that is going on in the country. So if that is higher than desired, obviously it coincides with strong economic growth, low unemployment, and rising wages, which can strengthen home prices.

So talk about it right here strong economic growth, low unemployment, and rising wages, that'll all help strengthen home prices. So over the last 30 years, it was very rare for mortgages. For mortgage rates to rise while home prices simultaneously dropped. So it only occurred in the early stages of the global financial crisis and during the recovery. So you can see the mortgage rates year over year change and the house price year over year change. So August 2007, these, this is when, um, the mortgage rates were changing, year over year. But what happened to the home price, uh, year-over-year change? Even though the mortgage rates saw some upward movement, um, because of that, uh, global financial crisis, so those housing prices didn't even see a year over year positive, um, positive change until March of 2012. So it took a while for the housing market to actually play catch up after that global financial crisis that we had going. So they do like to talk about this lag effect. So obviously our economy needs to play catch up with the change in these interest rates. So with the change in the interest rate, it's, you're not necessarily going to see this huge change in the housing prices until, a couple of years down the line. So they did talk about how they tested, whether or not there was in fact that lag effect, and they explored the relationship between the historical mortgage rates and the housing. Two years later. So as you can see here, um, this is what the two-year lag of the housing price growth looked like. So the mortgage rate declined versus the house price growth was 190 months over those 30 years. And then the mortgage rate growth for the versus the house price growth was 97 months. So you can see the difference in how the prices of these homes are continuing to rise. But as these mortgage rates decline, and then the houses decline, I mean 37 months, as we had said, it took a couple of years after that financial crisis to kind of get back into the swing of things with ours. and so then these mortgage rates grow, the mortgage rate growth, and then the house price decline. The number of months was 17 months, which is right there in the middle of all of that happening and how everything was just going bonkers and everything. Everybody was just losing money left and right. So we see how these changes go year over year, but it does not matter that those interest rates are rising.

These home prices can still rise as well. They just might not rise at the crazy rates that we were seeing over these last two years. So because of the rise in these current interest rates, are we going to see these huge price declines? Well, obviously we talked about how chances of seeing these major price declines, we are really probably not going to see everyone saying, Well, prices are dropping. Everybody's slashing prices, these huge price adjustments. Well, it's more of like everybody's talking about how they're more of like a price improvement, not these huge, crazy prices. Slashing these prices, yes, we are seeing price adjustments, but over the last few months, these homes have been so overinflated.  People have been paying top dollar for their homes, but for the most part at the top of the market. Whereas if we kind of look over here into the median sales price that we have going on right now, um, back in January of 2021, the median sales price here in the Dallas Fort Worth area was $280,000. And then moving over here to January of 2022, that median sales price jumped up to $340,000. So at the peak of the market, which was back this last May and June, we saw the median home price of $400,000. And here we are now at the end of October, um, beginning of November, and we are now down at $373,000.

So for the most part, all of these people selling their homes or wanting to purchase a home right now, They probably didn't buy their home back in 2021, which means their home was probably even lower than that. So they had probably seen price improvement over the years that they have owned their home. If they just bought their home back in May or June, they're probably losing money. But as we said, the way people were having to overpay for a lot of these homes, people were paying $150,000 over asking in some cases and having to come to a lot of times out of pocket with cash just to purchase these homes. But we are not having to, but we are not seeing that right now, so even though these interest rates are now over 7%, you can have a lot more negotiating power when purchasing your next house. You're able to buy a home, and not have to pay any of the extra fees. We're back to where the seller pays the title policy and for the survey, and we negotiate all terms. We’re able to negotiate the repairs on a home. We're able to get some seller concessions sometimes based on what might. Happen in the current situation based on whichever home you're purchasing. And on top of it, you're not ha if the home doesn't appraise, you're not having to sign these crazy appraisal waivers where you're saying, I will pay that extra a hundred thousand dollars above asking even if the home doesn't appraise. So, you have some wiggle room with negotiating as well in order to not have to come out with that extra a hundred thousand dollars in cash so you can put that a hundred thousand dollars into the down payment of your home. A lot of people who were not putting the 20% down on their houses are now. A lot of times able to do so and maybe avoid that PMI as well. So, there are a lot of different reasons why purchasing a home now for 7% can be better than purchasing a home back when it was 3%. Yes, over the course of 30 years. But say you had to use all your savings in order to purchase that home. Maybe you have those savings in the bank and you're able to purchase, you're able to use that for your monthly mortgage payments. For example, obviously, there are a lot of scenarios based on where it is you're moving, based on what it is you're looking for when purchasing your next house, and what situation might be right for you.

But one of the biggest factors for a lot of people is if you are relocating and you need to purchase a home, you're going to be buying it no matter what the interest rate is. And, that is still being fueled by a lot of people who are ready to get into their first home because they're realizing that these rental rates have just gone through the roof, and they can actually own a home even at a 7% interest rate for the same price as they were paying for rent. And if you get, uh, and if you get that tax right off and you get to build your own wealth by purchase, by buying your own home, it's a lot better than renting somebody else's. So, another factor to investigate is if you need to purchase a home, whether you're relocating, or if you want to buy your first home. There are a lot of situations and there are a lot of great lenders that can help you find the best situation for you, whether you're going FHA, conventional, VA, or any type of financing. All those things are now finally on the table to help you make the buying process that much easier. So if you have any questions, if you need a local lender, or if you need help to answer when the right time to purchase a home is best for you, don't hesitate to reach out.

Give us a call, shoot us a text, send us an email, and we would absolutely love to just get on a Zoom call and let you know what we can do to help you make that smooth move here to the Dallas, Texas area.

Source: https://advisor.visualcapitalist.com/historical-mortgage-rates-vs-housing-prices/